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Do Appraisers Use Distressed Properties as Comparables?

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Many of our readers ask us if appraisers use distressed properties (short sales and foreclosures) as comparables when doing an appraisal on non-distressed properties. We have posted on this issue on several occasions (examples: here and here). Last month, the Appraisal Institute issued a paper on the subject. In the paper, the Institute explained that:

“Foreclosures and short sales can provide important information for appraisers, who develop valuations based on market data and market forces."

On whether an appraiser should use distressed properties as comparables, the Institute was very direct (all items in bold were shown as bold in the original paper):

"An appraiser should not ignore foreclosure sales and short sales if consideration of such sales is necessary to develop a credible value opinion."


And they explained the possible differences between short sales and foreclosures:

"A short sale … might have involved atypical seller motivations and so might not be an ideal comp…

A sale of a bank-owned property might have involved typical motivations, so the fact that it was a foreclosed property would not render it ineligible as a comp.”

Bottom Line

Some will argue that distressed properties should not be used when appraising non-distressed properties. However, there is no longer any doubt that they will be.

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34 Responses to “Do Appraisers Use Distressed Properties as Comparables?”

  1. Jakeduffy February 7, 2012 at 9:53 am # Reply

    comments are always insightfull.

  2. Karins February 7, 2012 at 10:49 am # Reply

    okay, so if Appraisers use  distressed homes as comparables on non distressed property that have a loan, won’t that in the long run create yet another distressed property?

  3. APPRAISALSOURCE February 7, 2012 at 11:17 am # Reply

    As an appraiser I would like to add that a majority of the foreclosures these days are NOT the same types of foreclosures you saw 5-6 years ago.  They are nicer homes that are in pretty good shape.  They are not the trashed out homes you saw in the past (although there are still some of those).  What you must consider is whether the foreclosure properties (both solds and active listings) would be reasonable alternatives to the property being appraised (similar in condition, appeal, size, quality, etc).  If they are, then they would be considered good comparables.

    • Sarasota Realtor Mike Payne February 7, 2012 at 8:07 pm # Reply

      I’m relieved to hear foreclosed properties in the Birmingham (AL) area typically are in better shape. Wish that (typically) were the case in Florida. RealtyTrac today reported Bank-owned foreclosures and short sales sold at a discount of 34 percent to non-distressed properties in the third quarter. This is not just Florida; this is nation-wide fact. Further, lenders spend an average of 348 days to foreclose in the U.S. and an additional 175 days to sell the property. In more than 130 short sales, I have SEEN more than a lifetime of distressed properties & deferred maintenance. Whether people live “rent-free” or abandon the property, even mild deferred maintenance adds up to DECREASE the value of the property and the comps. It’s inevitable. By the time a “debt owner” repossesses & then dispossesses the property MANY, MANY months have passed…especially in judicial foreclosure states. Can you even fathom a property in Florida surviving a humid, hot summer without AC. Just last week, a foreclosure near my own home FLOODED out when the new owner who yet to move in experienced a burst water supply line in a guest bath. No one even thought that those rubber supply lines could be weakened by no AC in the house for 29 months that property was abandoned. Buyer had turned water on during inspections and kept all utilities on after closing to accommodate pool people. Buyer had no clue such damage was even possible. I have NOT seen even ONE foreclosure that compares with a NON-distressed property. 100% of my real estate business is distressed properties…sadly. In no way does a NON distressed property serve as a reasonable alternative. When banks pull properties back to community standards and certify these properties free of mold & (potential) issues related to properties abandoned and without AC/running water for months if not YEARS, foreclosed properties MUST sell at a discount. Who in his/her right mind (knowing what I’m sharing with you) would invest in such as risky purchase WITHOUT a steep discount?

      Mike Payne
      http://www.sarasotahomesforsalenow.com

      • Experienced REO agent February 12, 2012 at 2:13 pm # Reply

        Convince the asset management companies & the lenders of this info!  They think they have VALUABLE properties that should sell for full potential value in little or no time despite the condition issues.

      • anonymous February 12, 2012 at 5:03 pm # Reply

        You’re talking about CONDITION ISSUES.

  4. Anonymous February 7, 2012 at 5:58 pm # Reply

    Question? If the Appraiser is not a Home Inspector, how do they know if it is a distressed Property or not?
    I know anyone can look at the paint and flooring, but I see lots of homes where the bank has repainted and put new flooring in. That doesn’t change the fact that the roof leaks (and the stains have now been painted over) or the HVAC doesn’t work, (lots of homes are appraised with no power on)

    So is the property considered “Distressed” simply because the bank was involved in the last title transfer, or is it the condition of the property that makes it “Distressed”

    • Sarasota Realtor Mike Payne February 9, 2012 at 9:16 am # Reply

      “Distressed” includes physical & sales condition of property. Whether real or imagined, BUYERS perceive “distressed” properties as discounts (or deserving of discounts). In many instances – and I’m referring to Sarasota (FL) area – buyers NOW know after 5 years of distressed properties that a short sale demands they wait a minimum of 90-120 days simply before bank responds…. How many house hunters are willing to wait 90-120 days with no guarantee? Regarding REOs (i.e. “bank owned” properties), buyer needs forensic team to try to uncover latent issues not even discernible to a probing home inspector. Too often (and many buyers know this now because of agents like me), properties have been abandoned for months…years! No electricity (read no AC in Florida), running water, or grounds maintenance including pest control. At a recent home inspection of a $682,000 listing (was $2.7MM during height of boom), invasive plumbing “detective” with camera discovered cement poured into drain lines. You see, “distressed” takes on new meaning for those of us who work front lines of ground zero. Many of us have seen enough distress for two lifetimes.

  5. Arn Cenedella February 7, 2012 at 6:24 pm # Reply

    For the purposes of this discussion, distressed and non-disteressed refer to the ownership of the property not neccessarily the condition. A distressed property is either: 1) a property where a lender has foreclosed upon and taken title to the property – these properties are also known as REO – “real estate owned” by banks and other lenders or 2) a property where the owner is “underwater” – i.e. they owe more on their mortgage than the property is worth.
    MLS listings of homes for sale typically indicate whether property is an REO or will be a short sale or is a “normal” sale.

  6. Jacki Pauley February 8, 2012 at 3:59 pm # Reply

    I don’t think distressed properties or forclosure properties should be used in appraisals.  It changes the whole picture of houses that are in good condition. 

  7. Sarasota Realtor Mike Payne February 9, 2012 at 9:34 am # Reply

     Respectfully, I disagree, Arn. I don’t know in what area you live and work, nor do I know your real estate practice/experience. However, I KNOW real estate in Sarasota, Florida, area. You can hope & wish for “one” market, but reality during distressed times easily confirms TWO markets…and in Florida it’s reality for as long as banks and government attempt to manipulate the market. Two recent examples of REASON for 2 markets: 1) buyer bought bank-owned property & sank $45,000 into owner-occupied property. A few months later, courts ordered new buyer out of this property within 24 hours. Minus all details, new buyer’s attorney was not able to “stay this execution.” New buyer will have title recourse but (according to new buyer’s attorney), new buyer may not have a claim against her $45k loss. 2) On short sale listing, a buyer came in a full list price. Incidentally, I know how to create sales strategy for short listings. What I don’t always know is SELLER (change of) intent. After 180 days, 2 banks responded, bank #1 approving payoff & bank #2 providing 2 payoffs: a/ lien release only and b/ waiver of deficiency. Yes, as you can imagine full waiver meant bank #2 wanted $22,000 MORE than for lien release. Though seller’s attorney and I CLEARLY had explained this reality many times during the listing, seller changed his mind at last moment, demanding BUYER pay additional $22,000 for property. $22,000 more for this property was madness, and buyer’s agent promptly submitted cancellation. You SEE, in no way – NO WAY – is the “distressed” market the same as the non-distressed market. In NO WAY ARE THEY THE SAME MARKET! (Yes, I’m shouting because after 5 years anyone remotely tied to real estate- even people outside ground zero- should know this). All day long, detractors could say I’ve pointed out exceptions to typical “distressed” property situations. To which I would say, “You are mistaken once more.” Even if exception to rule were the case, once seed is planted in buyers’ minds that this sort of crap could happen to them, most buyers gladly pay more for NON-distressed property, something more tangible & achievable. This is real estate reality in Sarasota, Florida, area. Incidentally, my mastermind group comprised of real estate agents, attorneys & others throughout the US share the opinions. This is reality for those of us who work real estate on the ground.

  8. Arn Cenedella February 9, 2012 at 10:54 am # Reply

    Hi Mike…..

    I am located in SF Bay Area.
    I have been a real estate broker since 1978, that’s 34 years but what do I know.

    CA is a non-judicial foreclosure state.
    Kind of sounds like Florida may be a judicial foreclosure state.
    But I don’t know Florida law.
    That may account for a difference experience.
    Yes there can be hassles nvolved with buying a distressed property.

    Yes distressed properties sell for less than non-distressed properties.
    That is true.

    My point is the MOST of the difference in value is due to difference in CONDITION of the homes.

    Distressed properties are often beat up, run down, and often times intentionally destroyed as folks tear off cabinets, take the furnace, all the carpet, and kick holes in the walls on their way out.

    Say you do a market study of a particular neighborhood and break the sales down for 3 bdrm 2 bath homes into distressed properties and non-distressed property.
    Let’s say it is a tract neighborhood where the homes were all built by the same builder at the same time.
    Say the data shows NON-distressed 3 bd 2 bath homes sell on average for $100,000.
    Say the date show distressed 3 bd 2 bath homes sell on average for $80,000.
    There is a $20,000 market value difference.

    One could say: See, there are two different markets.

    However, I believe it would be more accurate to say this $20,000 difference is due to the fact the on average it would cost $20,000 to bring the condition of the distressed home up to the condition of non-distressed home.

    It is the condition of the property that effects value more than whether the property is owner occupied or bank owned or underwater.

    • Sarasota Realtor Mike Payne February 9, 2012 at 10:11 pm # Reply

      Arn,

      REAL people (aka “normal” sellers and buyers; not to be confused with investors) care nothing about splitting hairs on definition of what is “distressed” or whether we have 1 or 2 real estate marketsone or two markets. Bottom line: distressed properties HURT their property value. Perhaps California’s NON judicial landscape blurs difference b/t distressed & non-distressed properties. In Sarasota, FL, area, a grade-school kid can tell the difference…nothing to do with real or imagined.

      Moment many buyers hear “bank-owned” or “short sale” (in Sarasota area) they say “NO way. Get me out of here!”

  9. John Slocum, Vancouver February 11, 2012 at 10:46 pm # Reply

    Hi Arn, here in Vancouver WA I performed a limited study a few months ago with a sample of 2-level homes, similar size and similar vintage over a 3 month period to see where the sold metrics came in.  130 Normal Sales averaged $117 per sqft; 94 REOs averaged $88 per sqft; 57 Short Sales averaged $86 per sqft; and 16 Rehab/Flips came it at $100 per sqft.

    With an approximately 25% difference between the typical normal sale and an REO sale, I would hope an Appraiser would be very careful when Appraising a non-distressed property in my market.  There must be something more to explain the difference than just property condition.  

    • ananymous February 12, 2012 at 2:30 pm # Reply

      You may be right about “more to explain.”  My opinion [as an experienced professional in the 15th year of working Real Estate] is that people believe in the media hyped myth that there’s BUYER MARKETS & SELLER MARKETS.  TOO MANY Buyers want something for nothing but those same people expect to receive the highest possible value & more when it comes to their property & them being a seller.  It all boils down to REALISTIC ATTITUDES.  Too many people don’t have one!

    • Indiana Realtor February 12, 2012 at 3:17 pm # Reply

      Try doing the same study with the adjustment figures like an appraiser or BPO provider uses — so you’re comparing apples to apples.  “Per sq ft” stats include lot size and all ammenities…  Not a fair way of determining value!  When one compares only sales price & not ammenities it’s like comparing apples to oranges.  For valuation purposes a professional should use the proper methods to determine a realisticly accurate value.

    • Tim in Fla February 12, 2012 at 6:17 pm # Reply

      Plain and simple ..8 0f 10 appraisal reports are completed by bank owned AMC appraisers or bank staff appraisers. They dictate the reporting requirements that pretty much make it unavoidable. Ask any appraiser who no longer is in business or has stopped receiving orders not “playing along”.Be mad at the right people !

  10. Indiana broker February 12, 2012 at 1:59 pm # Reply

    I agree with you!  Lenders & asset managers will have a hard time proving differently. 

  11. Jhclark February 12, 2012 at 5:18 pm # Reply

    such properties should be used IF the represent a significant market in a subject area. A key measure is if a Large number of competing “LISTINGs” in a location are foreclosures or short sale offerings. An appraisal is a “current measure of value” (ie TODAY).  If sales and more important “Current offerings-ie TODAY” WILL/WOULD be competing (ie in volume) they DO SET THE MARKET. However, though sale may indicate such, they are PAST. It is likely that the # of current listings will indicate a locational TREND that cannot be ignored. I advise check current LISTings very closely!!!

    • Mike February 13, 2012 at 1:26 pm # Reply

      Very interesting discussion in the comments. I think lenders have long since decided to consider distressed comps. The question is now a matter of how to determine the impact on a normal home price. 
      Obviously, distressed comps are never a true comparison, because the purpose of the appraisal is/should be to determine whether a normal sale would payoff the loan. (Lenders always lose money on a default and there has never been such a thing as 100% security.) That’s not to say foreclosures don’t effect values throughout a real estate market.For what its worth, Jhclark, I think you’re right, assuming I understand you correctly.  Whether you view distressed properties as a separate market or just part of a larger, single market, a high volume of distressed comps will generally put a ceiling on normal home prices. But how do you determine the impact on home values? A good appraisal should factor in both (1) the volume and (2) the condition of distressed properties in an area. I’m guessing there should be a “Florida Factor” that also accounts for the amount of hassle required to buy a distressed property.  Do people think the current methods of appraisal already account for this? Is it enough to just use distressed comps? My guess is no, because it seems that lenders tend to over-value distressed properties while undervaluing normal homes.  

  12. Jhclark February 12, 2012 at 5:21 pm # Reply

    additional. An Appraisal should reflect an estimate of what the property would likely sell fore TODAY under current market conditions -good or adverse.

  13. Kevin February 13, 2012 at 12:46 pm # Reply

    I deal with this a lot as a listing for a Standard Seller who flips from trustees sale after rehab and eviction.  There are two consistent issues that I feel are not discussed here but very prevalent in our market.  # 1 is having appraisers literally tell me they do not want too many cost adjustments because “underwriters don’t like to see them”.  I was baffled to literally hear that explanation from an appraiser while in the same conversation he said that he agreed that a cost adjustment for what we were discussing was warranted but he wasn’t going to make it.  This is not the first time I’ve had that conversation with an appraiser.

    My biggest issue however is if there is only going to be 1 market then appraisers have to be able to calculate and adjust for “Marketability”.  If I have a Standard Sale with direct access to the real seller and it is a “Go Direct” rehabbed home considering all buyers then we have literally exposed our property to any and all qualified buyers.  If a comp sale in a subsequent appraisal is a Short Sale or REO where in the listing it clearly states “NO FHA due to Condition” or “Cash offers only” etc. you are severly limiting the the marketability of that property and a Fair appraisal should bridge that gap.  The mere stigma of Short Sales and REO’s to a lesser degree affect their marketability.  I know many of you (not saying all of you) line up your Standard Sales first to show your clients and if there are enough you don’t even show Short Sales or REO’s or you do so as a contrast with explicit warning to your client that the process for procuring that house is risky and may take months to ultimately hear nothing.  Should there be only 1 market than this “marketability” contrast needs to be taken into consideration for there truly to be a system that yields an “apples to apples” comparison.

  14. Paul Collins February 16, 2012 at 5:20 pm # Reply

    While condition can be a factor in the marketability of REO properties, it is not the driving force in my market based on many if not most of the inspections I have done.  This is also consistent with interior pictures of sales I can see through the mls system.  I have seen many properties where the foreclosed property is in very good condition, even to the point where the floors still have tracks from the vacuum wheels left after a cleaning.  These properties still sell for a measurably and often substantially lower price than arms-length transactions in the area.  This is the result of what I believe to be an REO or non-arms length (NAL) transaction stigma.  This stigma has a measurable impact in many cases and the adjustment resulting from analysis of the market data can lead to the development of an accurate value estimate while using REO/NAL sales.
    The description of the impact that a stigma has on a property as being a separate market may be something that we can debate, but I think that would miss the whole point that I believe the description is merely a tool for explaining an adjustment.  Whether we describe the difference in marketability as a stigma, two markets, or some other clever combination of words, the fact remains that there can be an impact from this sort of factor on the sale of a property and if the sale is one of the best available comps, an adjustment needs to be made to the sale for this factor in order to avoid misleading the client.
    In other areas of the country, as I understand it, there is typically not an REO/NAL stigma and properties in good condition will sell at a price consistent with arms length transactions.  The important thing to remember is that every market is different and before an appraiser decides to adjust, or not adjust, for the REO/NAL stigma a thorough analysis of local market data is required.  On the other end of this analysis, it is incumbent on the client or anybody else reading the report to read the entire report and either understand the analysis behind an adjustment or to ask questions and try to understand an adjustment before closing their mind and refusing to concede that it is possible for an REO/NAL stigma to either have or not have an impact on the value.

  15. Bob February 18, 2012 at 8:16 am # Reply

    If there are not enough non-distressed comps availiable, I think it is okay o use foreclosures as comps as long as they are adjusted to reflect the cost of work normally required to bring it to a comparable condition when compare to the subject property.  Short sales will always be a problem, however, because the banks just want it off of their books.

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  19. Jerry Davids February 22, 2017 at 11:10 pm # Reply

    How much of a price collapse happens when a single family house out in the country run’s out of water? The owners offered me a 10% discount(I laughed because trucking in water is not cheap) not realizing their property is now considered “distressed” because the cost to drill might be $60-$100,000 for a deep well. The neighbors spent $60,000 only to get 3 gallons a minute. If the house has other problems do you think its possible to get 30-40% off what Zillow claims? Zillow does not reflect “water running out”, “Illegal dwelling” and other problems I will have to cure. Your article was enjoyable, thank you!

  20. Brandon Lee May 16, 2017 at 6:47 am # Reply

    Although foreclosures can sell for significantly less than similar non-distressed homes, appraisers will consider foreclosures and short sales as comparable sales. If the appraiser selects a distressed property in disrepair as a comparable, but your home is in tip-top shape, the appraiser will adjust the value to reflect the difference in condition. Appraisers also make price adjustments to correct for the stigma that bank-owned properties carry. The foreclosure market can negatively influence, but not necessarily determine, the appraised value of a normal property.

  21. Boby June 12, 2017 at 5:29 am # Reply

    Despite the fact foreclosures can sell for very much less than similar non-distressed homes, appraisers will recognize foreclosures and short sales as comparable sales. If the appraiser selects a agitated property in disrepair as a comparable, but your home is in good shape, the appraiser will adjust the value to reflect the variation in condition. Appraisers also make price adjustments to correct for the disgrace that bank-owned properties carry. The foreclosure market can negatively influence, but not necessarily determine, the appraised value of a normal property.

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  4. Stephanie Haraway » WILL THE APPRAISAL PASS? - February 25, 2012

    […] Should appraisers use foreclosures and short sales (distressed properties) as comparables?  Whether you agree or disagree with this, it will probably happen according to a recent article posted on KCM.   I have heard mixed opinions on appraisals.  Some people say that there has been an increase in appraisals not passing and other people in the real estate business say that it has rarely happened to them during a sale.  How can appraisers use a foreclosed property that has absolutely no upgrades to justify the price of a home with average sellers that do have a well-maintained house on the market?  If it doesn’t appraise, buyers will have to pay the difference and the contract could be terminated.  This article does go on to say that short sales may not be used as often as foreclosed properties due to “atypical sellers.”  Read more on this topic at the following website:  http://www.kcmblog.com/2012/02/07/do-appraisers-use-distressed-properties-as-comparables/  […]

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